Fun Land is considering adding a miniature golf course to its facility. The cour
ID: 2633589 • Letter: F
Question
Fun Land is considering adding a miniature golf course to its facility. The course would cost $60000, would be depreciated on a straight line basis over its 4-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $30000 a year with $9000 of that amount being variable cost. The fixed cost would be $9000. In addition, the firm anticipates an additional $12000 in revenue from its existing facilities if the course is added. The project will require $6000 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 10 percent and a tax rate of 40 percent?
Explanation / Answer
Annual depreciation = 60,000 / 4 = 15,000
Annual cashflow = (30,000 - 9,000 - 9,000 + 12,000) * (1-40%) + 15,000 * 40% = 20,400
NPV = -60,000 -6,000 + 20,400 / 1.1 + 20,400 / 1.1^2 + 20,400 / 1.1^3 + 20,400 / 1.1^4 + 6,000 / 1.1^4 = $ 2,763.34
Answer: NPV = $ 2,763.34
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